Multinationals are rethinking their Chinese strategies as the country shifts from being a manufacturing powerhouse to a consumer-driven nation.

These companies are facing fresh challenges as market changes make doing business domestically more complicated. For manufacturers it is no longer as simple as finding a prime location and suitable employees, producing in foreign markets and then exporting.

Consumer goods manufacturers and service providers often find the market is so big their current presence in some big cities is not widespread enough for success.

To counter this, firms may decide to increase investment in research and development (R&D), marketing and the service sectors, intensify penetration of the market and integrate management.

Among the multinationals that modify their goods for Chinese applications and expand their local service network, a common strategy is improving the efficiency of local management by setting a single goal, a single plan and a single brand. Such practices are expected to significantly improve multinationals' competitiveness.

Philips celebrated 20 years of business in China last month. It has 35 joint ventures or wholly-owned subsidiaries and more than 60 offices nationwide.

The firm has begun integrating some common functions at its ventures into unified platforms under the One Philips principle, according to David Chang, president of Philips China.

The consolidation covers the information technology support unit, a unified human resources management system, financing, training, marketing and public and government relations.

"The company also formed a China Strategy board with the participation of heads of its five business units that is responsible for formulating the direction of the company," Chang said.

Like Philips, 35 per cent of multinationals are consolidating operations in China, according to a survey by the Chinese Academy of International Trade and Economic Co-operation completed earlier this year. The academy is a thinktank affiliated with the Ministry of Commerce.

The survey shows multinationals have been fine-tuning their management structure.

But their methods are somewhat different. Some, such as Japan's Matsushita, put previously independent business units under the umbrella of the company's head office in China.

Others, like Finnish company Nokia, have merged their manufacturing bases.

As China's economy evolves - growing larger, more complex and more competitive - so too does the way that multinational corporations are managing their operations, according to experts from the Boston Consulting Group.

CEOs and other senior executives at multinationals in the United States, Europe and Asia are focusing more of their time and resources on China, a study by the Boston Consulting Group shows.

China operations have a very senior, accountable sponsor at the global level - at Samsung, for example, the China CEO is one of three top group executives. A continual, top-down management push is reinforced by management processes - Michael Dell of Dell Computers and other CEOs visit China at least once a year.

Multinationals are working to bring the industry value chain, including R&D, into China. Samsung has set up a 300-strong handset R&D laboratory in Beijing.

All these firms' China operations tend to be given a value-added role. Kodak's China organization is preparing an integrated strategy across six businesses.

"With the survey, we tried to look at some general ways in which these multinationals, despite being large, complicated, global organizations, were able to achieve some sustained focus on China and orient their companies toward accelerated activities in China," said David Michael, a vice-president at the Boston Consulting Group's Beijing office.

Expectations that China's market will continue to grow are driving some multinationals to go deeper into the country, such as Coca-Cola which has an ambition to "go to the villages."

Its China President Paul Etchells said that he wants to increase the geographical spread of the company's bottling plants and aims to increase its penetration in less developed and rural areas of China.

The move was based on the company's prediction that China will be its third-largest market by 2008.

With GDP growth continuing to increase at a rate in excess of 8 per cent, the prosperity that was once confined to the larger urban areas is now starting to filter into the countryside.

Many migrant workers that have returned to the countryside have brought with them the necessary capital to set up their own businesses or invest in existing family ventures. This means increasing spending power in rural areas - something food and beverage companies will continue to keep an eye on.

Coca-Cola's marketing and distribution network has tended to concentrate in the three main urban areas around Beijing, Shanghai and Guangdong. But with growing wealth distribution and a rapidly developing infrastructure outside the main urban areas, opportunities are increasing further afield, Etchells said.

Foreign retail companies are also moving into second-tier cities, spurred on by retail sales rising by 13.3 per cent to 5.4 trillion yuan (US$649 billion) last year, and the increasing competition in the major cities.

Wal-Mart, the world's largest retailer, plans to open as many as 15 new stores in China this year, competing for a foothold with Carrefour and Metro Group. Wal-Mart, which has 40 outlets in major cities such as Beijing and Shenzhen, will focus on smaller provincial cities, Joe Hatfield, Wal-Mart's chief executive for Asia, said in an earlier interview in Beijing.

(China Daily May 17, 2005)